Pass on a Family Business: Steps To Consider To Avoid Pitfalls

Written By Kaisa Kokkonen Published March 26th, 2010

Keeping a business in the family isn’t for the sensitive types -even Donald Trump must have his moments of doubt. In fact only approximately a third of family-owned businesses succeed under a second generation of ownership and the survival rate drops to about 10 percent when the third generation takes over. However, it is also a fact that 40 percent of Fortune 500 businesses are family owned. You better get started by now if you dream of passing your future firm on to your grandchildren.

So, let’s see, what you could do to avoid some of the pitfalls or at minimum be somewhat prepared.

Step 1: Create a family constitution

Write some kind of a family-business constitution – or a rule book. You probably should include both a future vision for the company and a set of guidelines for handling potential issues. Many companies elect to bring in a consultant who specializes in family businesses to help–and to referee.

Step 2: Early Bird Catches The Worm

It takes years to devise an effective succession strategy – it doesn’t always come easy. You may want to have a family council specifically to discuss succession issues. Regular meetings with structured communication between family members are something you should never ignore. If you make some of the meetings off-site retreats, even better.

Step 3: The Role of an accountant and Lawyer

To minimize estate-tax bills you should consult with your accountant and lawyer. It is not the greatest idea to leave your successors with a tax bill so large they’re forced to sell your former company to pay it. If you think that tax problems rank with family discord as the great destroyers of family businesses, you are right.

Step 4: Management vs. Ownership

Keep in mind that management does not have to equal ownership. Some family businesses select one relative to operate the business but split overall ownership among several relatives.

Step 5: Reality Check

Be objective and realistic. Try to evaluate everyone’s education, past career histories, work ethic, strengths and weaknesses. Also, the truth may be that the family black sheep may be great with non-family employees, suppliers and customers but not with the family.

Step 6: Diversity

Try to have all the potential successors work outside the family business for portions of their careers. In addition, during their early years in the family business, ensure they report to supervisors they’re not related to. It is a really bad idea skip over the bottom rungs of the management ladder – they need to have worked in the firm’s lower echelons as well. You must earn the respect and knowledge by doing – not inheriting.

Step 7: Training

I would suggest that if you decide to leave you better start training your successor at least a year before the final change by gradually increasing his or her responsibilities. This kind of training really allows you to groom the chosen successor. Your “pet” in a way.

Step 8: Outsider

Keep in mind that the survival and success of your business are the ultimate goals. In other word, you may have to accept the reality that a successor from outside the family may be the best choice for the health of the company. It many times is.

Roger Due

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